1999-2000 Parallels

 Seeing more and more signs that we are repeating a 1999/2000 bubble blowoff top.  It doesn't affect my intermediate term outlook for the next 2 months, but it does affect my longer term outlook following the November election for the next 12 months. 

Market Internals/Divergences

First the obvious sign that this similar to 1999/2000:  Nasdaq outperforming the S&P 500, and the S&P 500 outperforming the Russell 2000.  You see the divergence getting bigger since the March lows.  A small number of stocks are leading the market higher and higher, while the rest of the market struggles to follow along. 

Nasdaq/SPX January 2019 to August 2020

Nasdaq/SPX January 1998 to May 2000

SPX/Russell 2000 January 2019 to August 2020

SPX/Russell 2000 January 1998 to May 2000

Increasing Volume

There has been a big increase in volume since March.  Nasdaq total volume has shattered all time record highs and printed above 6 billion shares daily during the peak in June this year.  Similar big increases in Nasdaq volume occurred in late 1999 to 2000.  Volume is a function of volatility and speculative interest.  There has been a big jump in speculative interest just by looking at Robinhood account activity and the number of new brokerage accounts opened since March among all online brokers.

Put/Call Ratio

The persistence of low put/call ratios since June is getting hard to ignore.  Here are a few things that point to a potential phase shift for options markets from the 2001-2019 regime to the new 2020 regime.  When an extreme level doesn't provide the same signals as it did in the past, and continue to persist, you have to consider a possible change in market regime.  If these low put/call ratios continue through the rest of the year, you have to adjust the definition of extreme put/call ratios to lower levels. 

 

 h/t @ResearchQF

One of the possible reasons for this change could be the prevalence of daytraders who speculate on the market not through stocks but through options.  And retail traders now seem to be more heavily involved with calls than puts, especially since the March lows.  Another reason could be the reduced level of put selling following a catastrophic result in March from selling out of the money puts for income. 

SPX is having a hard time cracking through to all time highs.  It is to be expected that there will be stiff resistance here after the amount of rallying this market has done over the past 5 months.  It will be choppy for the next week or two and then I expect a sharp pullback in September.